Unfortunately redundancies are still a common feature across all sectors of the economy in 2010, as companies of all sizes struggle to contain costs in order to survive.
“From the company’s perspective, it is important that the process is correctly managed so that the cost savings are achieved in the most tax efficient manner but not at the expense of damaging morale or the company’s reputation.”, said Jackie Masterson, taxation partner with Russell Brennan Keane.
She added, “Clearly for the people being made redundant, the entire process is stressful, challenging and frightening. It is critical to assist employees in a confidential and supportive way.
Larger companies making people redundant often make an ex-gratia lump sum payment to employees, on top of their statutory entitlement and structuring these ex-gratia payments in the most tax efficient manner for employees, whilst ensuring the company complies with all of its obligations, is always a key concern.”
Jackie continued, “Providing a high quality tailored supportive service to the company or directly to the employees being made redundant is very important. Companies often bring in expert independent advisers to explain to the employee, in layman’s terms, what it means for him or her.
In many cases, maximising the relief available to employees is relatively straightforward and Revenue has a very good guide on its website outlining the general rules (IT 21 Lump Sum Payments on Redundancy/Retirement).
Often, the main challenge is explaining to the employee the options available and the implications for them in terms of pension planning and prior / future redundancies” claimed Jackie. “Explaining Top Slicing Relief and how it works for the particular individual to potentially increase their net payment, is also an important aspect.
Other considerations apply where, for example, the employee has stock options / awards in the company or periods of foreign service as this may increase the level of relief available”.
According to Jackie there is an important inter-action between the tax free amount available on redundancy and an employee’s future tax free pension lump sum entitlement and the employee needs to understand this issue to make an informed decision. Also, the choices available in terms of existing pension contributions need to be understood by the employee to permit an informed decision on whether to:
- Obtain a refund of contributions (if the employee has been with a company for less than two years).
- Leave the pension benefits in the existing scheme.
- Transfer to a new employer’s scheme.
- Set up a PRSA-Personal Retirement Savings Account.
- Transfer to personal retirement bond
She added, “From the employee’s perspective, they will normally have a number of questions regarding their tax status and options going forward. Depending on the level of advice / assistance the company wishes to provide, they may engage an adviser to meet with the employee to explain both the termination and pension package and also address any related tax queries.
Jackie reported that at recent meetings she has found that employees are particularly interested in tax incentives for setting up their own business, retraining, or advice in terms of emigrating”.
Jackie can be contacted at jmasterson@rbk.ie or (01) 6440100.
About Russell Brennan Keane
Russell Brennan Keane is one of Irelands leading business advisory and accountancy firms. With 50 years experience providing professional advisory services to a range of clients in the mid to large corporate market in Ireland, from offices in Dublin, Athlone and Roscommon.
